Moving from ‘Boom and Bust’ to ‘Reform and Innovation’

A new report by the Breakthrough Institute and coauthors Mark Muro and Letha Tawney puts in stark terms a looming truth: America’s clean energy policies are at a crossroads. As a result of our policy choices, policy emphasis, and political gridlock, continuing the status quo potentially sets up the clean tech industry for a precipitous decline. But even with a blanket extension of many of the policies currently on the books, the budding clean tech sector faces an uncertain and unsustainable future without significant policy reforms.

1. The federal government is making a historic investment in clean energy, but most of it is set to expire by 2014.

Between 2009 and 2014, the federal government will invest over $150 billion in clean technology or over triple the investment made during the previous seven years. These investments include direct expenditures in RD&D, tax incentives, grants, loan guarantees and other subsidy programs across numerous technology categories like advanced batteries, solar, wind, nuclear, energy efficiency, and the electric grid.

In comparison, the Apollo Program, which ran from 1961 to 1972, cost a total of $25.4 billion or $170 billion in 2005 dollars. In other words, this level of investment is similar to other historic technology challenges. Of course, comparing sending a human to the moon with transforming the global energy system across numerous technologies is comparing apples to oranges, but in simply terms of federal investments it’s useful. But there is a looming problem: public support is about to fall through the floor. According to Beyond Boom & Bust, federal clean tech investments will fall by 75 percent by 2014 compared to its peak in 2009. Much of this is due to investments made through the temporary Stimulus ending. Others it’s due to expiring incentives and subsidies. For instance, the Production Tax Credit for wind projects is set to expire at the end of this year and the 1603 cash grant program for solar energy expired at the end of 2011. Yet the significant decline in public support couldn’t come at a worse time as the clean tech industry is still in its infancy and requires further development and innovation to reach competitiveness with fossil fuels.

2. Most of these public investments are not optimized to drive the significant stream of clean tech innovations needed; therefore clean tech is largely beholden to the boom-bust cycle of the federal budget.

While the impending drop in public support is unsettling (as is the lack of Congressional action), it’s only half the issue. Existing clean technologies rely on public support to remain competitive with fossil fuels. Without this support, existing clean tech cannot stand on its own in the energy market except in very niche areas under ideal circumstances. Our clean energy policy emphasis reflects this as nearly two-thirds of public investments go to the deployment of existing technologies through tax incentives and subsidies.

Focusing on deployment is both benefitting and hurting the industry. It’s benefiting clean tech by building out supply chains and driving down price through incremental innovations and scale-up. For example, the report finds that the cost of new wind turbines has fallen 27 percent since 2008, largely the result of greater production and installation due to subsidies making the wind turbines more cost competitive.

Emphasizing deployment hurts the industry by ignoring that substantial cost and performance improvements are needed for clean energy to compete without subsidies, requiring both a steady stream of breakthrough and incremental innovations. Even with incremental innovations, clean energy is still more expensive than fossil fuels. To make clean tech cheaper we need the full spectrum of innovation. Instead the lion’s share of public investments is geared towards just one narrow end of the innovation spectrum, while the research, development, and demonstration of next-generation technologies that hold greater competitive promise are significantly underfunded.

As a result, many existing clean technologies are beholden to the boom-bust cycle of federal deployment policies to remain competitive. It’s a cycle that will continue as Congressional interest in budget austerity ebbs and flows as well as whether the public can tolerate increasing energy subsidies. The best way to break this cycle is by focusing on innovation.

3. A new clean energy policy framework and discussion – and not the elimination of clean tech programs – is needed to move the industry from subsidy reliance and boom-bust cycles to a robust future.

As it stands, today’s deployment policies or more like a blunt tool: they incent the deployment of the lowest-cost clean technology, but do little to drive down the cost of higher potential clean technologies or encourage technology improvements and innovation. Instead, we continue to deploy similar technology pathways and potentially lock-out the development of better technologies.

But the key message of the report is that it doesn’t have to be this way. We can better optimize and align our clean energy policies to drive both breakthrough and incremental innovation to move clean tech towards cost competitiveness without subsidies. As a result, the clean economy won’t rely on the ebb and flow of uncertain government deployment subsidies and incentives.

And I want to emphasize, this means reform not elimination. Clean technology must not only compete in a commodity energy market it must also do so with entrenched fossil fuel incumbents that have benefitted from a tilted playing field for well over a century. New clean tech entrants will require some support to make the leap into the market, it’s just a matter of what that support looks like. It’s clear that the current character of support, heavily emphasizing deploying existing technologies, won’t cut it.

Potentially lost in the discussion of how to make better clean energy deployment policies is the continued support fossil fuels receive from the federal government. I can imagine policymakers didn’t have a discussion on fossil fuel deployment reform decades ago and nor are fossil fuel advocates clamoring for reform now. Fossil fuel subsidies don’t drive innovation (in fact federal investments in R&D are driving the shale gas revolution) and are providing no tangible benefits to society. The same principles outlined in Beyond Boom & Bust report should be used to gauge fossil subsidies and by no means should the policy discussion focus on clean tech subsidies while the fossil fuel industry continues to reap significant tax-payer benefits. In fact, as ITIF argues, we should eliminate fossil fuel subsidies to support the innovation of clean tech.

But the stakes are too high to ignore clean tech policy reform in general because of our climate and energy challenges. We need to get our policies aligned with innovation to get the cheap clean tech we need. Without doing so, our policies will fall short of the audacious transformation of the global energy system that is required.

About the author

Matthew Stepp is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF) specializing in climate change and clean energy policy. His research interests include clean energy technology development, climate science policy development, transportation policy, and the role innovation has in economic growth.

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